How Financial Institutions Should Disclose Information on Financial Instruments Beginning Q1 2018 following the FASB’s New ASU 2016-01

Financial institutions will be required to start accounting for certain financial instruments differently as early as the first quarter of 2018.

In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. For public business entities (PBEs) that are calendar-year institutions, the update will be effective January 2018. For non-PBEs that are calendar-year institutions, it will be effective January 2019.

This update impacts all financial institutions that hold financial assets and liabilities and changes how these organizations will recognize, measure, present, and disclose information about certain financial instruments.

It’s prudent to begin evaluating the potential financial statement impact now as well as whether early adoption could be advantageous.

Effective Dates

The effective date for ASU 2016-01 depends on the whether the financial institution is a public business entity or not. This can be determined by consulting ASU 2013-12, Definition of a Public Business Entity.

PBEs

The effective date for PBEs is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For a calendar year-end PBE, the update will first be effective in financial reporting period ending March 31, 2018.

Non-PBEs

The effective date for non-PBEs is for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. For a fiscal year-end non-PBE, the update will first be effective in financial reporting period ended December 31, 2019.

Impact

There are a number of items in the update that require changes or additions to current financial statement presentation and related disclosures.

Equity Investments

These will be required to be measured at fair value with changes in fair value recognized in net income. This excludes equity investments accounted for under the equity method of accounting or those that result in consolidation of the investee.

Equity securities will no longer be eligible for trading or available-for-sale classification. There’s an option where a financial institution may choose to measure equity investments that don’t have readily determinable fair values at cost, less impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

Liabilities

When a financial institution elects to measure a liability, such as Trust Preferred Securities, using the fair value option, the update requires a separate allocation in other comprehensive income that reflects the change in the fair value resulting from a change in the instrument-specific credit risk—the entity’s own credit risk, for example.

This is a change from current practice, which requires the entire change in fair value be recognized in earnings. The fair value changes related to an entity’s own credit risk will no longer be reporting in earnings but as a component of other comprehensive income.

Deferred Tax Assets

The update clarifies that a financial institution should specifically evaluate the realizability of deferred tax assets related to available-for-sale securities similar to other deferred tax assets. A financial institution will no longer be able to support the realizability of a deferred tax asset related to available-for-sale securities based solely on its ability to hold securities until recovery or maturity.

Fair Value Disclosures

PBEs will be required to report, prospectively, all fair value disclosures based on an exit price concept, eliminating the ability to use an entry price for certain fair value disclosures. This change will be significant for many PBEs that have used the entry price notion for disclosure purposes of financial instruments measured at amortized cost, which historically has included loans held for investment.

Financial Assets and Liabilities

Separate presentation of financial assets and financial liabilities by measurement category and form of financial asset—that is, securities or loans—will be required on the balance sheet or in the accompanying notes to the financial statements.

Impairment Assessments

The update also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When the assessment indicates that impairment exists, the financial institution is required to measure the investment at fair value.

Reduced Disclosure Burdens

Several areas in the update reduce the disclosure burden for financial institutions.

Non-PBEs

These entities will no longer be required to disclose the fair value information, such as methodologies and assumptions, about financial instruments measured at amortized cost. This provision may be early adopted by non-PBEs for any financial statements that haven’t been issued or made available for issuance.

PBEs

The update also eliminates the requirement for PBEs to disclose the methods and assumptions used to estimate the fair value that’s required to be disclosed for financial instruments measured at amortized cost on the statement of financial position. However, a financial institution is required to continue to present the fair value of those financial instruments either parenthetically on the face of the statement of financial position or in the notes to financial statements.

Early Adoption

Financial Institutions may elect to early adopt two provisions of the update for financial statements of annual or interim periods that haven’t been issued or made available for issuance, including those in 2017. However, if early adoption is elected, both provisions must be adopted.

Early implementation of the update related to measuring instrument-specific credit risk in other comprehensive income is permitted for a PBE or non-PBE financial institution that has elected to measure a liability at fair value in accordance with the fair value option.

Non-PBEs may early adopt the provision to not apply the fair value of financial instruments disclosure guidance in Accounting Standards Codification®(ASC) 825-10-50. Implementation of this portion of the update substantially reduces financial instruments disclosure requirements.

All entities should apply the amendments by means of a cumulative-effect adjustment to the statement of financial condition as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values—including disclosure requirements—should be applied prospectively to equity investments that exist as of the date of adoption. 

Next Steps

It’s smart for financial institutions to begin assessing the impact of this update on their financial reporting and system of internal control as soon as possible. This can help foster a smoother implementation of the new guidance and can predetermine:

  • Cumulative effect adjustment
  • Required disclosures for period of adoption
  • Exit price

We’re Here to Help

If you’d like to learn more about how ASU 2016-01 may affect your organization, contact your Moss Adams professional.